Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
More Inflation, Less Growth?
After a fairly rough start to the week, stocks clawed their way back to respectable levels by the close Friday. First we learned – surprise, surprise – that Iran hasn’t been honoring the nuclear treaty signed during the Obama administration. Trump’s intention to break the treaty probably exacerbated the market’s negativity, but bulls spent the remainder of the week trying to find a reason to rally. On Wednesday, the focus turned to the Fed in hopes of a more dovish policy; on Thursday, a kinder, gentler trade relationship with China; and on Friday, a jobs report that would inspire. In each case, I think the fish came up short of the story. That didn’t stop the bulls from sending stocks higher during Friday’s trade – for no particular reason – in a rally that became somewhat self-fulfilling. Stocks wound up mixed at the end of the week, with most of the major indices unchanged except the Apple-driven NASDAQ, which added about 1.5%.
The most interesting development came from the Fed’s FOMC meeting. In it, the Fed increased its inflation expectations while holding pat on its “moderate” economic growth forecast. The Fed also insinuated that they could handle inflation “running hot,” where the rate of price increases exceeds the Fed’s 2.0% target for an indefinite period of time. Again, to me, this is all code for a Fed that has lost control of the bond market and is now being forced to follow the interest rate curve higher. Many investors seem content with that possibility because the market is convinced that inflation (or higher rates in this instance) equates to greater economic growth. As regular readers of this missive know, this is only a perception. Rates are moving higher because of a developing funding crisis, where the supply for US debt exceeds demand (lenders).
Incidentally, the 2-year Treasury yield hit another interim high this week of 2.50%. The Fed doesn’t plan to raise rates again till June, which places them 75 basis points behind the curve. In other words, as is already embarrassing and/or obvious to anyone paying attention, the bond market has taken the lead in discounting the ongoing imbalances.
Away from all that, Treasuries at the long end of the curve remained somewhat steady, while the dollar breakout rally showed signs of stalling. That helped the metals and oil prices stabilize later in the week. Aiding the situation, I believe, was the April ISM manufacturing data. Both the overall numbers and the component totals (employment, new orders, etc.) were noticeably lower than last month, except for the prices-paid component, which added 1.2 points to 79.3.
Best Regards,
David Burgess
VP Investment Management
MWM LLC
